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Judge Robert Wilkins of the District of Columbia Circuit. Credit: Diego M. Radzinschi / NLJ

Six months after failing to block AT&T’s merger with Time Warner, the Justice Department urged a Washington federal appeals court Thursday to undo the multibillion-dollar merger deal, arguing that the combination creates a telecom giant with near-unbridled bargaining power.

The blockbuster hearing drew a close-to-capacity crowd to the U.S. Court of Appeals for the D.C. Circuit, where a three-judge panel heard arguments in what is widely considered the most significant antitrust case in decades. The panel—including Judges Robert Wilkins, Judith Rogers and David Sentelle—questioned four lawyers for two hours, allowing the advocates to speak well beyond their allotted time. As Sentelle said early on in the hearing, “We’re not very good at obeying the clock.”

In antitrust circles, the case was closely watched from the beginning as a rare example of the government contesting a so-called vertical merger. AT&T and Time Warner completed their merger in June after U.S. District Judge Richard Leon of the District of Columbia rebuffed the Justice Department’s challenge to the deal, which combined a pay-TV distributor with the content provider behind HBO and Turner channels such as CNN, TBS and TNT.

At the outset of his arguments, Justice Department attorney Michael Murray said the deal would give AT&T the leverage to blackout content and threaten to poach other companies’ customers if rival distributors “don’t pay up.” Murray said Leon erred in his June ruling by considering whether blackouts would happen as a result of the merger, rather than whether the threat of blackouts would give AT&T undue leverage.

Makan Delrahim, the assistant attorney general in charge of the Antitrust Division, attended the hearing along with the government’s lead trial lawyer, Craig Conrath. Conrath at one point shook hands and spoke briefly with his trial adversary, Dan Petrocelli, the O’Melveny & Myers partner who mounted AT&T’s defense. Petrocelli sat during the hearing at the same table as Keisler and Mayer Brown partner Andy Pincus, who filed an amicus brief for 37 economists and former government officials in support of Leon’s decision.

Here are some highlights from Thursday’s hearing:

What happens if the government loses?

From the time the Justice Department sued to block the AT&T-Time Warner merger, observers said a loss for the government could spell trouble for future attempts to block vertical mergers. Keisler on Thursday downplayed the consequences of a government loss for the future of antitrust enforcement, saying that an affirmation of Leon’s decision would not prevent the government “from bringing factually-supported vertical merger cases in the future.” Rather, he said, a decision for AT&T would set the precedent that economic modeling needs to be based on reliable data to receive credibility in court. “That’s all the case stands for,” he said.

Keisler touted an offer AT&T has made to networks that would allow fees to be set through arbitration for at least the next seven years. As AT&T was pursuing the Justice Department’s approval for the Time Warner deal, Keisler said the company looked to the conditions imposed on Comcast’s acquisition of NBCUniversal, which required Comcast to submit to arbitration for disputes over price terms.

The arbitration condition was “sufficient then,” Keisler said, so AT&T thought it would be “sufficient now” with the Time Warner deal. That turned out not to be the case.

Because of the arbitration offer, Keisler said, “Turner has less leverage as a result of the merger.” When the judges questioned whether AT&T would remain committed to arbitrate pricing disputes, Keisler replied, “We are absolutely committed to this.”

“We don’t make an offer in the market … with our fingers crossed behind our back,” he said.

Murray noted that, in the Comcast deal, the arbitration condition was backed by a “de novo arbitral review” by the Federal Communications Commission.

One judge questioned whether the government “overtried” its case.

As Keisler hammered the government’s modeling, Wilkins noted the Justice Department’s argument that the analysis was not necessarily crucial to the case. Wilkins suggested that the government had perhaps “overtried” the case by presenting more evidence than it needed. Sometimes, he said, the government takes a “belt and suspenders” approach and “then the suspenders break.” Keisler replied that the economic model was, in fact, critical to the government’s case. Remove it from the government’s challenge, he said, and there’s “nothing here.”

No, really, how much will consumers actually save?

Judges and lawyers pointed out Thursday that Leon, in his June opinion, misstated the projected consumer sayings from the AT&T-Time Warner deal as $350 million. AT&T’s predicted savings from the deal amount to $350 million, but the total savings passed on to consumers is expected to come in at $78 million. “It appears, whatever that number is is not a number that will be passed on to customers,” Wilkins said, referring to the $350 million figure. “That seems somewhat troubling.” Murray replied: “The district court, as your honor pointed out, [used] the wrong number.” When asked about Leon’s mischaracterization of the $350 million figure, Keisler said it “makes absolutely no difference to the outcome of the case.”

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